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'Help to Buy' scheme – folly or fortune?

Posted: 21/06/2013

How does the scheme work?

Under the current ‘equity loan scheme’, the government lends buyers up to 20 per cent of the value of a new-build home priced below £600,000, interest-free for five years. The buyer has to put down a deposit of at least 5 per cent.

The second phase of the scheme, the ‘mortgage guarantee scheme’, begins in January 2014. This is where it gets really interesting, because buyers of all properties – not only new build – will be able to borrow with only a 5 per cent deposit. The government will guarantee up to 15 per cent of the home loan as an insurance policy for the banks, as long as the property is valued at less than £600,000. Existing homeowners can also use the scheme to remortgage their property.

The scheme will not be available to buy-to-let landlords, people looking to buy a second home, or foreign buyers with no credit history in the UK. However, these rules will essentially be self-policed, with lenders required to collect a declaration stating that the borrower has no interest in a property anywhere else in the world.

What will be the impact on the property market?

The purpose of the scheme is to get people buying and to get builders building, in order to kick-start the UK economy, and the first part of Osborne’s scheme, which began in April this year, has already given the UK property market a massive shot in the arm, apparently subsidising about £1.3bn in house purchases in the past four months, and with nearly 7,000 new-build home reservations through the scheme, most of this activity being outside the London area. If growth carries on at this rate, and with the inclusion of resale properties from April 2014, there is a very real chance that we will see a housing boom.

What are the risks involved?

The International Monetary Fund and the government’s own Office for Budget Responsibility have both warned it risks creating another property bubble, and there are fears that it will boost demand for housing without necessarily boosting supply, which would most likely inflate house prices and put home ownership even further out of reach for renters.

Some feel the scheme smells of American sub-prime mortgages. On the surface, that isn’t correct because buyers will have to pass a pretty rigorous borrowing assessment and they won’t be borrowing 100% or more of the property value. However, buyers will only have to put in 5% of the property value, and research following the 2008 credit crunch lending crisis found that there is some correlation between loans to values and defaults. In other words, the less buyers put in, the more likely they are to default. However, 100% or more LTVs are statistically far more likely to default.

So, perhaps it’s not sub-prime, but the risks depend on the combined ability of regulators and lenders to prevent credit-impaired individuals from accessing the scheme. New general rules requiring higher standards of lenders and preventing them from relinquishing responsibility for credit checking are due in 2014, 3 months after the second part of the scheme starts. One would hope they would be brought forward for Help to Buy.

But will the new regulations work? The exclusion of buy-to-let owners seems to be on the basis of self-certification, which is doesn’t inspire confidence. And given that mortgage lenders will in effect have insurance for losses, through tax-payers money, one would hope that the Help to Buy rules would be far tougher than for typical mortgages. In the last 4 months alone, the government has already committed to guaranteeing about £260m in loans, and this is only the beginning.

So where will it end? An exit may prove hard, mainly for political reasons. Help to Buy is already proving very popular, and governments don’t tend to abolish popular policies for voting reasons. Furthermore, abolishing the scheme could cause house prices to drop, at a time when interest rates may be rising again, which the government would not want to do, so withdrawing the scheme could prove extremely challenging.

In summary, I think this scheme and particular its second phase could have a huge growth impact on the UK property market. As an estate agent, this should be music to my ears. And yet, I can’t help but wonder if the UK’s economic heart could be overwhelmed by the force of this ‘help to buy’ defibrillator. Please excuse the metaphor.